Independent risks can be diversified by holding a large number of uncorrelated assets with independent risks.

Question

Quizplus · Accepted Answer

Holding a large number of uncorrelated assets with independent risks is a way to diversify and reduce the total risk of a portfolio. By doing this, the risk associated with one asset is not correlated with the risk of another, so the overall risk of the portfolio is reduced. This is the essence of modern portfolio theory.

Independent Risks Can Be Diversified by Holding a Large Number